August 17, 2009

Swoopo - Sites Ask Users to Spend to Save

Some people will stop at nothing to
snap up a bargain — even if it means paying too much.

Swoopo starts the bidding at zero
dollars and zero cents.

That
is the paradoxical principle behind Swoopo, a Web site that offers a seductive and
controversial proposition to online shoppers.

The site, which started in Germany
and was recently introduced in the United States, sells appliances, electronics
and other products in auctions that typically top out at a small fraction of
the retail price.

This month, a new 40-inch Samsung
TV, which normally sells for $1,500, sold for $67.92, and a white LG
refrigerator with a price tag of $1,498 went for a cool $77.90.

But there is a catch, of course:
Swoopo users are charged 60 cents every time they bid, and those charges add up
quickly.

The complicated machinations behind
Swoopo and its online imitators are drawing attention from critics who say they
prey on human foibles, like the tendency of people to overlook the small
increments of money they spend to pursue alluring discounts.

These critics also say that players
face long odds in Swoopo’s auctions, where they must compete against people in
the United States, Britain and Germany. And they say that Swoopo is making a
nice profit on each item when all the bidding fees are tallied.

Competing bidders spent a cumulative
$2,337 in their losing effort to buy the $1,498 refrigerator, for example.

Swoopo says it must spend much of
that revenue to advertise the auctions and attract customers to the site, which
it says had 2.5 million visitors in July, double the number it had a year
earlier, and a total of 2.5 million registered users.

“In aggregate, consumers trying to
obtain these products are overpaying,” said Glen Whitney, a mathematician and a
former quantitative analyst at the hedge fund Renaissance Technologies, who was
asked to evaluate Swoopo. “Unless you have an edge over other people who are
bidding, and you can get them to subsidize your purchase, you shouldn’t do it.
It’s a chump’s game.”

Executives at Entertainment
Shopping, the German company that runs Swoopo, counter that the auctions are
fun and challenging while offering the possibility of a killer deal.

“We are combining elements of online
auctions, skill games and traditional e-commerce,” said Gunnar Piening, the
company’s chief executive. “We are trying to bring back fun and excitement into
shopping, which hasn’t been there in a long time.”

Swoopo recently acknowledged that
one aspect of the game is not much fun: spending money to bid on products that
someone else wins. Last month the site began allowing American users to apply
that money toward buying the product at full price. Swoopo’s retail prices are
marginally above those offered by sites like Amazon.

Mr. Piening says that auctions have
lost much of their luster online. EBay’s marketplace, once a mainstay of
e-commerce, has been shrinking for years amid complaints of fraud and the
proliferation of automated bidding software that allows people to win auctions
at the last possible moment.

Swoopo avoids fraud by selling all
of the products itself, often shipping them directly from suppliers. Bidding
starts at zero, and players can bid up the auction price only in small set
increments, like 1, 2 or 6 cents. Swoopo also offers its own automated bidding
tool on the site, called Bid Butler. There is no possibility that users can
“snipe” an auction at the last moment, because a few secondsare added to the
clock with every new bid.

That, incidentally, creates the
impression of Swoopo auctions that are about to end but last for hours more, a
feature of the site that critics say is subtly misleading.

Nevertheless, Swoopo’s spin on the
Internet auction appears to be suddenly in vogue. This spring, August Capital,
a Silicon Valley venture capital firm, invested $10 million in Entertainment
Shopping, to help it expand worldwide.

In addition to a growing number of
small Swoopo imitators with names like GoBid and Rockybid, another start-up,
Project Fair Bid, has raised $4.5 million from three American venture capital
firms and plans to unveil its site next March.

People who use these sites say they
can be addictive, frustrating and potentially rewarding with the right
combination of patience, timing and perhaps luck.

Last month, Carolyn Parslow, who
manages a flea market in Trumbull, Ohio, won a new refrigerator on Swoopo for
$9.66 — plus the $61.80 she spent on bids. But she sounds a note of caution,
saying that she has lost far more auctions than she has won, and that there
does not appear to be a way to gain a persistent edge over rival bidders.

“It’s not easy. As soon as you think
you have it figured out, you lose,” Ms. Parslow said. “You pull your hair out
more than you jump up and down with excitement.”

Nick Marchevsky, a 27-year-old
unemployed piping draftsman from Sewell, N.J., is more successful than most
Swoopo users: he says he has won 27 items in the last few months, including
digital cameras, TVs and Mac computers. But his strategy, he says, is simple,
bullheaded persistence. He spends up to two hours in each auction and makes
sure he outspends other bidders.

That also means he has, on occasion,
spent more money in a winning effort than the item itself would have cost.

Mr. Marchevsky argues that winning
on Swoopo requires dexterity and patience — players must know when an auction
is likely to end, so they can allocate their time and money. And they should
never casually bid if they are not serious about prevailing.

“You have to have some skill at it,
or you are not going to go anywhere,” Mr. Marchevsky said. “I wouldn’t call it
gambling at all.”

In that regard, the company behind
Swoopo is not taking chances, retaining a well-known gambling lawyer, Anthony
Cabot of the Las Vegas law firm of Lewis and Roca, as an adviser. “Lotteries
are games of chance, and an auction does not have what you would call any
systematic chance, a random event that determines the winner,” Mr. Cabot said
in an interview.

I. Nelson Rose, a consultant to the
gambling industry and professor at Whittier Law School, said federal regulators
would probably evaluate Swoopo and its ilk not as games of skill or luck, but
as auction sites. In that respect, he said, the law on the topic is somewhat of
a gray area.

“It turns out the idea of paying for bids does
not seem to be specifically allowed by states, as it is in most of Europe,”
Professor Rose said. “But it doesn’t seem to be explicitly prohibited either.”